Impact of Third Party Credit Ratings on Loan Appraisal Process and Resultant Non Performing Assets

Abstract

Due to the growing problem of Non Performing Assets (NPA) in India, banks are coming up with stricter rules and verification processes for approval of loans. It is noticed that there is an unsaid deep dependency on the third party rating agencies. With the recent implementation of the IBC, there seems to be a lot of confusion on how to deal with the defaulters. This research will throw light on this process and understand it more clearly. Since employees from different banks will be surveyed, key parameters are to be identified and relationships to be tested between them. The Research aims at Understanding the loan appraisal process of various banks and identifying key elements that affect a decision for loan appraisal. This report also strives to highlight the possibility of manipulation of rating data in such agencies which is proved further in the paper while identifying other key parameters that affect the volume of NPAs in the bank. The data was collected with the help of questionnaires provided to bank officials. It was analyzed using logistic regression and on the basis of this analysis, it can be inferred that fraudulent credit rating do affect the probability of default. In other findings, maintaining a continuous communication with borrowers was identified as a key strategy to prevent defaults along with a robust internal audit system. Involvement of non-banking entities such as chamber of commerce and federation of industries in the decision-making process regarding NPAs is also identified as an important strategy in tackling the issue. On the basis of the survey conducted, it can be seen that increasing liquidity and increasing competition in the banking sector is partly responsible for the growing NPAs. Strict monitoring and regulation of credit rating agencies by SEBI is also suggested.